House votes along party lines to repeal key Dodd-Frank financial reforms

The law created the Consumer Financial Protection Bureau, which oversees credit cards, mortgages, payday loans and other financial products. (Feb. 3, 2017)

The House voted along party lines Thursday to repeal many of the stricter regulations enacted after the 2008 financial crisis, taking the first step in a long-held Republican desire to roll back landmark rules they complain are hurting banks, restricting consumer credit and slowing economic growth.

The legislation, which faces major hurdles in the Senate because of united Democratic opposition, would continue the Republicans’ deregulatory push under President Trump by dismantling key parts of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

That law, passed with almost no Republican support, was the biggest overhaul of financial regulations since the Great Depression and one of President Obama’s signature accomplishments.

Dodd-Frank is strongly supported by consumer advocates, but opposed by banks and other financial firms.

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Its key reforms included a prohibition on federally insured banks from engaging in risky trading, a new liquidation authority to safely shut down teetering financial giants to avoid future bailouts and the creation of the independent Consumer Financial Protection Bureau to oversee credit cards, mortgages and other financial products.

The House legislation, called the Financial Choice Act, would undo or scale back much of Dodd-Frank. The bill was approved 233 to 186. All but one Republican — Walter Jones of North Carolina — voted for the bill. No Democrats supported it.

Its major changes include repealing the trading restrictions, known as the Volcker Rule, and scrapping the liquidation authority in favor of enhanced bankruptcy provisions designed to eliminate any chance taxpayers would be on the hook if a major financial firm collapsed.

The bill also would repeal a new Labor Department regulation, largely still pending, that requires investment brokers who handle retirement funds to put their clients' interests ahead of their own compensation, company profits or other factors.

And in a move vociferously protested by Democrats, the measure would gut the powerful consumer bureau.

The agency — the centerpiece of Dodd-Frank — has provided consumers about $12 billion in refunds, mortgage principal reductions and other relief since opening in 2011. It played a key role in penalizing Wells Fargo & Co. for its creation of about 2.1 million unauthorized accounts.

The Financial Choice Act would strip the agency of its ability to closely monitor financial firms for compliance with consumer protection laws and specifically prohibits the bureau from writing any regulations on payday and car-title loans.

The bureau's director would be subject to removal by the president for any reason and the agency's independent funding stream would be eliminated, making it subject to congressional appropriations where Republicans could reduce its budget.

President Trump said during the campaign that he wanted to dismantle Dodd-Frank. In February, he directed Treasury Secretary Steven Mnuchin to consult with regulators about changes to the law and to report back by this month.

House Republican leaders decided not to wait. They pushed forward with a revised version of legislation introduced last year by Hensarling, chairman of the House Financial Services Committee.

Democrats labeled the legislation "The Wrong Choice Act" and said it risked creating another financial crisis by removing important regulations and consumer protections.

“Donald Trump and Republicans want to open the door to another economic catastrophe like the Great Recession and return us to a financial system where reckless and predatory practices harm our communities and families,” said Rep. Maxine Waters (D-Los Angeles), who has led opposition to the bill.

Unlike changes to Obama's healthcare law, making most changes to Dodd-Frank would require 60 votes in the Senate. Republicans in the Senate are working on their own financial regulatory bill that could gain the needed Democratic support.

But Senate Majority Leader Mitch McConnell (R-Ky.) said last month that he was not optimistic about making changes to Dodd-Frank.

The White House this week said it supported House passage of the legislation "as a necessary and important step in moving financial reform legislation through the Congress."

A key feature of the Financial Choice Act is the ability for any bank to avoid strict federal regulatory oversight if it holds capital of at least 10% of assets. The current requirement is 3% for most banks and 6% for institutions considered systemically important.

Big banks aren't thrilled with such a high hurdle to avoid regulations and have not embraced the legislation.

An analysis by the nonpartisan Congressional Budget Office estimated that the eight largest banks — including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. — would be unlikely to choose the option because they would have to raise large amounts of capital given their size.

House Republicans pointed to Wall Street's concerns about the capital levels, as well as the Financial Choice Act's tougher federal penalties for financial fraud, to counter charges that they were doing Wall Street's bidding.

They said the legislation was needed because Dodd-Frank rules had made mortgages tougher to obtain, forced banks to scale back fees that had helped allow them to offer free checking accounts, and placed a heavy burden on community banks.

"This law may have had good intentions, but its consequences have been dire for Main Street," said House Speaker Paul Ryan (R-Wis.)

But Democrats said Republicans were making the country vulnerable to another financial crisis.

Democrats said that bank profits are up and lending has increased since Dodd-Frank was enacted. Bank profits hit a record $171 billion in 2016, according to the Federal Deposit Insurance Corp. And in the first quarter of this year, profits were up 13% from a year earlier, the FDIC said.

And while the largest banks have grown significantly since Dodd-Frank was enacted, the profit gains haven't been limited to them. Community bank profits in the first quarter were up 10% from a year earlier, the FDIC said.

Republicans point out that the number of banks have declined under Dodd-Frank. And they have, from 6,719 in the first quarter of 2010 to 5,031 in the first quarter of this year, Federal Reserve data shows. But that’s the continuation of a steady decline since the mid-1980s, when there were about 14,000 banks.

Commercial and industrial bank loans have increased 77% since hitting a post-crisis bottom in 2010, according to the Federal Reserve. Consumer lending also has not been restrained in recent years.

Household debt, including mortgages and auto and student loans, has been rising for four years. And in the first quarter, that debt topped the peak reached in 2008 before the economic crash led to a historic downturn, the Fed said.